Thong Guan Industries Berhad TGUAN FYE22Q3
Solid growth with margin compression and high capex expected for expansion
Last Updated: 1 Dec 2022; Analysis is based on FYE21 results and FYE22Q3 interim results.
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- At the time of writing this page, I owned shares of TGUAN.
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- Fair value estimates and earnings projection are not included here, so you won’t perceive buy/sell recommendation.
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Click to view filing of the FYE2021 Annual Report in Bursa Announcement and filing of the FYE2021 Q3 Report in Bursa Announcement.
Strong revenue growth due to increase in average selling price and sales volume
TGUAN has shown strong revenue growth +20.1% YoY, FYE2021-Q2: MYR 296.83M ➡️ FYE2022-Q2: MYR 356.50M; +20.6% compared the 9 months cumulative period in the prior year, FYE2021-9M: MYR 886.3M ➡️ FYE2022-9M: MYR 1,068.8M. The increase in revenue was contributed by the increase in the average selling price and sales volume of premium packaging films, food wrap and food & beverages products.
For the 9 months cumulative period, TGUAN recorded a growth in revenue of +20.1% or +MYR 165.97 million for its plastic products division and +24.1% or +MYR 16.56 million growth in its food, beverages, and other consumable products division.
TGUAN Revenue by Segment
| Plastic packaging products | Food, beverages and other consumable products | ||||
| 2022-9M | 2021-9M | % | 2022-9M | 2021-9M | % |
| 983,582 | 817,614 | +20.1% | 85,216 | 68,654 | +24.1% |
| Reason: Increase in sales of its premium stretch films, premium packaging films and PVC food wrap | Reason: Increase in sales of tea and coffee products and the fast moving consumer goods (FMCG) products in Sabah | ||||
According to FYE2021 Q2 filing, TGUAN’s capacity expansion plan will include the installation of six new production lines in 2022. Upon their full commissioning, TGUAN’s yearly production capacity will increase by 50,000 tonnes. Plus, TGUAN expects the foreign migrant workers to arrive in the end Q3 and in Q4. This will boost TGUAN’s output especially garbage bags and courier bags which is expected to have positive contribution to revenue growth.
Margin compression due to increasing costs of polyethylene since Apr-20
Polyethylene is the key raw material of manufacturing stretch film and PVC cling film. Prices of polyethylene have been increasing from Apr-20: USD 6,000 to Oct-21: USD 10,000. Thus, gross margin of TGUAN decreased from FY2020: 16.5% to FY2021: 15.4%. TGUAN’s quarterly gross margin decline to 14.03%.
Positive sign: Since Oct 2021, prices of polyethylene dropped significantly to USD 8,000 level in Oct 2022. Operational excellence, economies of scale and increase of selling price helped TGUAN sailed through the challenge. This is proven with below comparison. The recent gross margins were more stable if compared to 2017 and 2018.
| Prices of polyethylene | Between USD 9,000 and USD 11,000 in 2017-2018 | Between USD 8,600 and USD 9,600 from Aug-21 to Jun-22 |
| Gross Margin | FY2017: 14.3% and FY2018: 12.4% | FY2021-Q3: 15.2%, FY2021-Q4: 14.4%, FY2022-Q1: 14.4% |
Prices of polyethylene seem trending down. I think TGUAN’s gross margin will return to 15%-16% level in 2023.
Steady operating margin despite of increase in minimum wages, higher expenses and the exchange losses
As shown below, operating income of TGUAN were trending up over the years. TGUAN was still able to maintain > 9.3% operating margin and 9.92% in FY2022-Q3 despite the drastic hike of interest rate, high inflation, continue appreciation of the USD and supplier chain interruptions.
Besides, TGUAN managed to maintain relatively stable ROIC over the years.
Healthy leverage and coverage
By any standard, TGUAN has adequate financial flexibility and ability to sustain its competitive position.
Consistent dividend payout and fluctuate free cash flow due to high capital intensity in expanding production lines
Refer to TGUAN annual financial performance, consistently around 20% dividend payout. Its FCF were fluctuate every year due to high capital intensity in expanding production lines. I won’t expect higher dividend payout in foreseeable future.
Advancecon Holdings Bhd’s 51%-owned indirect subsidiary Spring Energy Sdn Bhd (SESB) is disposing of a piece of land in Kedah to plastic packaging manufacturer Thong Guan Industries Bhd for RM34 million. The land disposal is expected to be completed before Feb 28, 2023. So, we should expect a RM34 million capex in early 2023.
Attractive valuations
TGUAN Financial Performance
| PROFITABILITY and EFFICIENCY | 2015-12-31 | 2016-12-31 | 2017-12-31 | 2018-12-31 | 2019-12-31 | 2020-12-31 | 2021-12-31 |
|---|---|---|---|---|---|---|---|
| Revenue | 710,998 | 742,868 | 831,203 | 861,615 | 939,204 | 960,581 | 1,214,944 |
| Growth YoY | 4.5% | 11.9% | 3.7% | 9.0% | 2.3% | 26.5% | |
| EBITA | 52,570 | 60,791 | 53,835 | 50,501 | 75,894 | 97,761 | 123,174 |
| Growth YoY | 15.6% | -11.4% | -6.2% | 50.3% | 28.8% | 26.0% | |
| EBITA Margin % | 7.4% | 8.2% | 6.5% | 5.9% | 8.1% | 10.2% | 10.1% |
| Net Operating Profit After Tax | 39,953 | 46,201 | 40,734 | 38,200 | 57,499 | 74,117 | 93,357 |
| Growth YoY | 15.6% | -11.8% | -6.2% | 50.5% | 28.9% | 26.0% | |
| Invested Capital | 448,088 | 495,023 | 551,796 | 631,552 | 737,630 | 817,593 | 950,352 |
| Growth YoY | 10.5% | 11.5% | 14.5% | 16.8% | 10.8% | 16.2% | |
| Return on Invested Capital % | 8.9% | 9.3% | 7.4% | 6.0% | 7.8% | 9.1% | 9.8% |
| Cash Conversion Cycle | 119 | 111 | 102 | 119 | 113 | 94 | 105 |
| Days In Inventory | 96 | 92 | 75 | 83 | 90 | 96 | 91 |
| Days In Receivables | 63 | 77 | 77 | 72 | 70 | 60 | 79 |
| Days Payable Outstanding | 39 | 57 | 51 | 37 | 47 | 61 | 65 |
| Earnings per share (Reported) | 0.324 | 0.340 | 0.249 | 0.259 | 0.373 | 0.192 | 0.237 |
| Growth YoY | 5.2% | -26.9% | 4.0% | 44.1% | -48.5% | 23.5% | |
| Earnings per share (Adjusted for capital changes) | 0.098 | 0.143 | 0.107 | 0.112 | 0.158 | 0.192 | 0.237 |
| Growth YoY | 45.0% | -25.0% | 4.3% | 41.6% | 21.8% | 23.3% | |
| LEVERAGE and COVERAGE | 2015-12-31 | 2016-12-31 | 2017-12-31 | 2018-12-31 | 2019-12-31 | 2020-12-31 | 2021-12-31 |
| Total Debt | 51,592 | 56,740 | 75,693 | 126,926 | 143,036 | 149,285 | 188,750 |
| Growth YoY | 10.0% | 33.4% | 67.7% | 12.7% | 4.4% | 26.4% | |
| Net Debt | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Interest Expense | (1,330) | (1,367) | (1,849) | (3,484) | (4,393) | (2,540) | (1,884) |
| Growth YoY | 2.8% | 35.3% | 88.4% | 26.1% | -42.2% | -25.8% | |
| Debt / EBITDA | 0.7 x | 0.7 x | 1.1 x | 1.8 x | 1.4 x | 1.2 x | 1.2 x |
| EBITA/Interest | 39.5 x | 44.5 x | 29.1 x | 14.5 x | 17.3 x | 38.5 x | 65.4 x |
| RCF to Net Debt % | — | — | — | — | — | — | — |
| FCFF to Debt % | 105.6% | 68.0% | 0.4% | -27.6% | 4.5% | 36.5% | -14.7% |
| CASH FLOW | 2015-12-31 | 2016-12-31 | 2017-12-31 | 2018-12-31 | 2019-12-31 | 2020-12-31 | 2021-12-31 |
| Unlevered Free Cash Flow | 54,503 | 38,598 | 269 | (35,009) | 6,401 | 54,494 | (27,773) |
| Growth YoY | -29.2% | -99.3% | -13128.1% | -118.3% | 751.4% | -151.0% | |
| Cash Return on Invested Capital % | 12.2% | 7.8% | 0.0% | -5.5% | 0.9% | 6.7% | -2.9% |
| Dividend Payout % | 24.60% | 25.54% | 26.01% | 32.14% | 23.20% | 22.53% | 18.41% |
| Dividends per share (Reported) | 0.080 | 0.087 | 0.065 | 0.083 | 0.086 | 0.043 | 0.044 |
| Growth YoY | 9.2% | -25.6% | 28.5% | 4.0% | -50.0% | 0.9% | |
| Dividends per share (Adjusted for capital changes) | 0.024 | 0.036 | 0.028 | 0.036 | 0.037 | 0.043 | 0.044 |
| Growth YoY | 50.6% | -23.6% | 28.9% | 2.2% | 18.2% | 0.8% | |
| Free Cash Flow per share | 0.139 | 0.099 | 0.001 | 0.089 | 0.016 | 0.139 | 0.071 |
| Growth YoY | -29.2% | -99.3% | -13128.1% | -118.3% | 751.4% | -151.0% |
| Fiscal year ends 31 Dec | Sept 2022 (FQ3) | Jun 2022 (FQ2) | Mar 2022 (FQ1) | Dec 2021 (FQ4) | Sept 2021 (FQ3) | Jun 2021 (FQ2) | Mar 2021 (FQ1) | Dec 2020 (FQ4) |
|---|---|---|---|---|---|---|---|---|
| Revenue | 356.50M | 379.30M | 333.00M | 328.68M | 296.83M | 307.30M | 282.14M | 242.73M |
| Growth YoY | 20.10% | 23.43% | 18.03% | 35.41% | 20.76% | 34.76% | 15.62% | 2.96% |
| Cost of Goods Sold | 306.47M | 320.49M | 284.99M | 281.24M | 251.63M | 257.45M | 237.54M | 204.77M |
| Growth YoY | 21.79% | 24.49% | 19.98% | 37.35% | 24.56% | -34.94% | 17.50% | -2.64% |
| Gross Profit | 50.03M | 58.81M | 48.01M | 47.44M | 45.20M | 49.85M | 44.60M | 37.97M |
| Growth YoY | 10.69% | 17.96% | 7.64% | 24.94% | 3.25% | -34.68% | 6.54% | 49.25% |
| Operating Expenses | - | 20.56M | 16.73M | 16.82M | 14.48M | 15.83M | 16.58M | 14.86M |
| Growth YoY | - | 29.86% | 0.92% | 13.19% | -14.05% | 108.21% | -16.61% | 229.13% |
| Operating Income | 35.35M | 38.25M | 31.27M | 30.62M | 30.72M | 34.02M | 28.02M | 23.11M |
| Growth YoY | 15.04% | 12.43% | 11.61% | 32.50% | 14.07% | -27.89% | 27.47% | 10.45% |
| Other Income (Expense) | - | - | - | - | - | - | - | - |
| Growth YoY | - | - | - | - | - | - | - | - |
| Net Profit | 27.12M | 29.47M | 24.60M | 23.17M | 22.38M | 25.56M | 21.77M | 17.04M |
| Growth YoY | 21.19% | 15.28% | 13.00% | 35.99% | 14.20% | -33.89% | 24.65% | -4.36% |
| Diluted EPS | - | 0.07 | 0.06 | 0.06 | 0.06 | 0.06 | 0.06 | 0.04 |
| Growth YoY | - | 15.81% | 12.86% | 41.96% | 12.75% | 21.93% | 19.74% | -15.55% |
| Diluted Average Shares | - | 394.56M | 394.77M | 380.26M | 395.52M | 396.12M | 394.29M | 396.75M |
| Normalised EBITDA | - | 46.44M | 39.38M | 38.98M | 37.81M | 41.41M | 35.47M | 30.46M |
| Margin Analysis | ||||||||
| Gross Margin % | - | 15.50% | 14.42% | 14.43% | 15.23% | 16.22% | 15.81% | 15.64% |
| Operating Expenses % | - | 5.42% | 5.03% | 5.12% | 4.88% | 5.15% | 5.88% | 6.12% |
| Operating Income % | 9.92% | 10.08% | 9.39% | 9.32% | 10.35% | 11.07% | 9.93% | 9.52% |
| Net Profit % | - | 7.90% | 7.49% | 7.42% | 7.99% | 8.74% | 8.17% | 7.55% |
Corporate Development
- 25 Oct 2022 – Advancecon to dispose of Kedah land to Thong Guan for RM34m
- 22 Jun 2022 – Thong Guan ventures into RE via GET programme
- 9 May 2022 – Thong Guan poised to expand into US market
- 5 May 2022 – Thong Guan spends RM150mil on expansion
- 26 Apr 2022 – Thong Guan Industries seeks to double revenue to RM2 bil by 2027
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